The Fed’s Monetary Delusion

Hey There Income Hunters,

 

While many spent the weekend playing golf or, I don’t know, installing gutters …

 

I spent mine cleansing myself of the anger I was feeling towards the Fed after Wednesday’s meeting.

 

And I gotta say … bourbon is a pretty good cleanser!

 

Speaking of cleansers … Cleansing the market of naked shorts not only feels great but also puts a lot more money in your trading account. Volatility Edge members, join me and Option Pit Director of Education Andrew Giovinazzi today at noon EST when we’ll look at a few more squeezable issues and throw you a trade or two. Not a Vol Edge member? Subscribe now!

 

Now, Federal Reserve Chairman Jerome “J-Pow” Powell’s performance may have been worthy of an Academy Award, but the truth is character actors don’t win Oscars.

 

J-Pow follows the same script every time — make the audience believe that printing lots of money is forever and always a good thing.

 

He did succeed at getting some economists to think the corrections in the bond and commodity markets last week were signaling deflationary conditions that justify his “transitory” inflation non-sense.

 

However, what he left out of the discussion was that deflation is a contraction in the total quantity of money and credit.

 

And that ain’t what we’re up against, folks.

 

The real reason bonds rallied was because quantitative easing continues to force feed the banking system with excess cash.

 

Just check the increase in the Fed’s reverse repo facility (RRP) to see what’s happening.

 

The June 16 accepted amount was $521 billion …  on June 17 it rose to $756 billion.

 

On the 17th, the Fed increased the rate they pay from 0% to .05% to secure the safety of funds that would trigger a crisis if they were unable to return positive returns to their customers.

 

Plus, Fed QE injects $120 billion into the banking reserves a month, even though the banks are not lending it due to concerns of not getting paid back.

 

J-Pow did one good thing last week — ignite a healthy, albeit painful for some, correction in commodities and precious metals.

 

So, let’s run through the impact on rates, the dollar and commodities 

 

Why Are Interest Rates Going Down?

The Fed’s understanding that the apparent lack of demand for money means deflation has the upper hand.

 

The idea that there is too much money in the system rarely occurs to them.

 

Meanwhile M1 money supply stands at $19 trillion in a $20 trillion economy

 

So, this is a critical point …

 

There is far too much money in the economy relative to genuine economic activity.

 

Last week’s headlines were taken to mean that the Fed is tightening, and money flowed from commodities and precious metals into bonds and the dollar.

However, as we dive into more details in each sector you will see nothing has changed — especially in terms of inflation to come.

 

Treasury Yields


Treasury yields have broken a long-term downtrend (the green line below), and are headed higher until the Fed initiates yield curve controls.


 

Rates would have to close on a weekly chart below 1.20% to negate the higher yield technicals. 

 

It won’t happen and I plan to set up a short in TLT as the US 10-year approaches 1.4%.

 

US Dollar

 

The table below is a snapshot of the main central banks and their balance sheet expansion since 2007… 

 

 

The US leads the world in this category which is extremely dollar bearish.

I want to introduce Triffin’s Dilemma, which describes how reserve currency nations must run destructive inflationary policies to satisfy the world’s demand for their currency …

 

Until, that is, a currency crisis inevitably leads to its ultimate rejection.

 

That’s where the US dollar finds itself today.

 

Global macro money flows will continue to move out of the dollar and move into other currencies and real assets, including commodities, raw materials and precious metals.

 

These flows will cause a collapse in the dollar just to keep up with the level of both our trade weighted and current account (twin) deficits:

 

 

Commodities

Commodities are in a secular bull market.

 

And thank you, J-Pow, for blowing the froth out of the market.

 

Commodities needed a healthy correction. 

 

The rally will continue in the weeks ahead.


Three Trades for This Week

1. Invesco DB USD Index Bullish Fund ETF (Ticker: UUP)

I purchased the Jan. 21, 2022, 25-strike puts for $.75. A stop loss and close out of the position on a weekly UUP close above 25.02 will limit losses. The target is 23 before expiry.

 

2. VanEck Vectors Gold Miners ETF (Ticker: GDX)

GDX’s current correction has pushed the stock into oversold territory. That’s a gift for this senior gold miners ETF. Even at the current $1,760-level for gold, the senior miners will generate excellent returns…

 

I executed a 35/45 call spread to Jan 21, 2022, for $2.18

 

3. iShares 20+ Treasury Bond ETF (Ticker: TLT)

This is another gift, with core consumer price index (CPI) inflation at 3.8% versus a 1.44% US 10-year yield.


I’m looking to sell bearish strategies on TLT and will execute a 146/141 put spread this week. Will use a sell stop above 1$48.10 with a target of $140.

 

Bring It Home

Our country is caught in an everything bubble fueled by massive debt.

 

The Fed is attempting to inflate it away.

 

How?

 

By printing massive amounts of money used to pay off a fixed amount of debt… 

 

The Fed will go to all lengths to keep fueling the bubble and inflation — including implementing digital currency and new rules that allow the Fed to bypass the banks and send money directly to spenders.

 

Once that’s accomplished, the bubble will burst when consumer psychology shifts and the public realizes the Fed is destroying the currency purposely to eliminate government debt.

 

That is when consumers will sell dollars to buy real assets — and gold and Silver will go parabolically higher.

 

So what to do?

Continue to focus on the trades that make money during inflation.

Sell the dollar, buy commodities and precious metals and sell bonds. These are trades that will protect your wealth and make easy money.

 

The other trade that works in today’s environment is playing for squeeze melt up rallies on heavily shorted companies

 

Andrew and I will take a closer look at that opportunity this afternoon at noon for the Volatility Edge crowd. Join us! 

 

Until then….

 

Live and Trade With Passion My Friends,

Griff

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